The nature of being an economist is the ability to balance the results of the past with the news of the present – and using both to manage expectations of the future. We will see all of these in a microcosm in the coming week with the publication of both the latest jobs report from the UK economy and the minutes from December’s Bank of England meeting.
There are few announcements that are more economically and politically charged than the unemployment report. Remember, the Bank of England first chose an unemployment rate threshold as the trigger for interest rate rises as part of its ‘forward guidance’ plan. That plan lasted around six months before it was changed to focus on wages, amongst other measures of economic performance.
Wages are currently rising here in the UK in real terms i.e. at a faster rate than rises in inflation. This is a new development in the UK. Wages have only outpaced inflation in three months since June 2008 and even now, most of this positive motion is not coming from a substantial increase in wages but instead the recent large falls that we have seen in inflation.
As we highlighted in today’s Morning Update – available here – falls in a country’s unemployment rate are not guarantees of imminent wage growth. The theory goes that as more and more people gain jobs, businesses must increase wages in order to tempt the right talent into their workforce. As the unemployment rate dips, pressure on wages should increase. "Whether we've seen the inflection point for UK wages and whether they should run higher from here will be seen on Wednesday."
Of course, there is a natural lag. Businesses appearing bleary-eyed from a recession and starting to grow are unlikely to start bringing on new staff immediately. Firstly, they are more than likely to make existing staff work longer hours to make up for the lack of productivity and secondly, which shareholder wants to pay out a company’s profits in the form of wages unless it absolutely has to?
Whether we have seen the inflection point for UK wages and that they should run higher from here will be seen on Wednesday morning. The combination of slower price rises and rising wages is an obvious plus for the UK economy and consumers within it.
We expect that the Bank of England will mention both the cause and effect in the minutes from their December policy meeting. While we will have to wait until February’s Quarterly Inflation Report for the Bank’s latest projections of inflation, it provides an obvious crutch with which to lean on should you be of the view that rate rises can wait.
Back in December, David Miles – one of the MPC members currently voting for rate rises – told the Telegraph that it is possible that when his term expires in August, he will be the only member of the Bank of England to not have seen rates rise during his tenure. I still think that rates will rise here in the UK towards the back end of 2015 but the nature of inflation targeting is the main risk to this.
These minutes may allow us to see whether the majority of the Monetary Policy Committee is focused on the headline rate of inflation in the UK or whether it’s core prices that are guiding their expectations. As we have seen with other inflation announcements in recent weeks, it’s not so much about the headline index but more the ‘core’ reading in my opinion. The harmful effects of falling commodity and energy prices are obvious but should an economy’s ‘core’ prices – that do not include these volatile measures – remain strong, then that is cause for optimism, will fuel higher rate expectations and hopefully a stronger pound too.
Disclaimer: The comments put forward by World First are only our views and should not be construed as advice. You should act using your own information and judgment. Although information has been obtained from and is based upon multiple sources the author believes to be reliable, we do not guarantee its accuracy and it may be incomplete or condensed. All opinions and estimates constitute the author’s own judgment as of the date of the briefing and are subject to change without notice. Any rates given are “interbank” ie for amounts of £5million and thus are not indicative of rates offered by World First for smaller amounts.
Recommended Content
Editors’ Picks
AUD/USD remains under pressure above 0.6400
AUD/USD managed to regain some composure and rebounded markedly from Tuesday’s YTD lows in the sub-0.6400 region ahead of the release of the Australian labour market report on Thursday.
EUR/USD faces decent contention around 1.0600
The knee-jerk in the Greenback reignited some buying interest in the risk complex and pushed EUR/USD to three-day highs near 1.0680, rapidly leaving behind the recent yearly low around 1.0600.
Gold dips on falling US yields as traders shrug off hawkish Fed remarks
Gold prices retreated from close to weekly highs during the North American session on Wednesday amid an improvement in risk appetite. The bullish impulse arrived despite hawkish commentary by US Federal Reserve officials.
Bitcoin price uptrend to continue post-halving, Bernstein report says as traders remain in disarray
Bitcoin price is dropping amid elevated risk levels in the market. It comes as traders count hours to the much-anticipated halving event. Amid the market lull, experts say we may not see a rally until after the halving.
Australia unemployment rate expected to rise back to 3.9% in March as February boost fades
Australia will publish its monthly employment report first thing Thursday. The Australian Bureau of Statistics is expected to announce the country added measly 7.2K new positions in March after the outstanding 116.5K jobs created in February.